Understanding the Tax Implications of Leasing

Lease or buy? Your choice will affect your tax situation

Part of your decision-making process should be to consider the tax implications. Here are a few things to think about:

You save big by leasing with pre-tax dollars

Let's assume your business has plenty of cash on hand to acquire vehicles or equipment. When you make a purchase, you're paying with post-tax dollars: That $60,000 item may cost you as much as $80,000 or $90,000 (depending on your specific tax situation). Why? Because your business needs that greater pre-tax income to net the $60,000 needed to make the purchase. When you lease, though, you’re doing so with pre-tax dollars: That $60,000 purchase costs your business $60,000 and your lease payments can be written off as a business expense.

Leasing won’t give you depreciation deductions

When your business owns a vehicle or piece of equipment, the business can take a tax deduction for the depreciation in value of that vehicle or equipment over the life of the item. When your business leases the same item, though, the depreciation deduction is not allowed.

But leasing may get you Section 179 tax advantages

Section 179 of the Internal Revenue Code allows you to fully deduct the cost of some newly purchased assets in the first year—but your company can also lease and still take full advantage of the Section 179 deduction. Be aware, though, that Section 179 can change each year (or even mid—year) without notice—which makes the next paragraph the most important one on this page.

Be sure to speak with a tax professional

Every business is different. Tax laws vary from state to state. Tax laws are revised regularly. It’s complicated stuff. Your best course of action? Do your research—then speak with a tax professional to understand all the financial implications before you make your decision.

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